Wednesday,
January 31, 2018 /1:15 PM /Cordros CapitalFLOURMILL published Q3-17/18 result yesterday, showing high double-digit
y/y growth (320% y/y) in post-tax profit to NGN3.6 billion. The net profit
almost tripled our estimate, and was above consensus by 28%. Gross margin
surprised to record high (since Q4-13/14), beating our estimate by 470 bps,
while opex, though higher by 17% y/y, trailed our estimate by 19%.Revenue was lower by 4% y/y and 13.6% q/q, as pricing effect has fully
tapered. We should also note the effect of seasonality, recovering competition,
pricing pressure in the Agro-allied division (sugar and fertilizer), and the
gridlock in Apapa factory road, on sales revenue. The Food (9% y/y) and Port
Operations (58% y/y) divisions recorded revenue growth while lower sales were
recorded in the Agro-allied (-33% y/y), Packaging (-43% y/y), and Real Estate
(-NGN63 million revenue) divisions. Overall, compared to our estimate, the
reported revenue was lower by 8%.The 20% y/y increase in gross profit was on the backdrop of faster
decline in cost of sales (-8% y/y) relative to revenue, and a 322 bps expansion
of gross margin (GM) to record high of c.16%. The first y/y expansion of gross
margin in the current year may have been underpinned by stable FX condition,
broadly softer commodities prices, and better energy mix from improved gas
availability.Operating expenses increased by 16.8% y/y and 7.3% q/q, with the margins
also rising by 87 bps and 94 bps respectively. Admin expenses remain the driver
of opex growth, with personnel/related spend and general admin expenses being
the major pressure points. Increasing competition and the Apapa traffic
situation are yet to reflect in marketing and distribution costs (-3% y/y).Finance costs were higher by 31% y/y and 21% q/q, and beat our estimate
by 20%. The higher-than-expected finance costs reflect the NGN12.6 billion q/q
increase in gross debt to NGN200.81 billion, representing net inflow from the
commercial papers issued in December.

Overall, whilst noting concern from the still-elevated finance costs,
FLOURMILL’s result is impressive, in light of the higher and lower than
expected gross margin and opex, respectively. We expect further upward revision
to 2018F earnings estimates and positive investor reaction, on higher
annualized net profit of N16 billion, compared to consensus’ N13.9 billion. Our
estimates are under review.